BC P3 projects built on unethical and unprincipled business practices — economist
Governments have wrongly embraced the idea that the private sector can build and operate less expensively than the public sector.
by Erik Andersen
There are three references the reader should be aware of.
First is an article titled "Macquarie model blowtorched." This article captures some of the primary findings of RiskMetrics Group out of New York. Their study was completed in early 2008. By personal letter, BC Premier Gordon Campbell was informed of the highly uncomplimentary remarks about Macquarie's unethical and unprincipled business practices. To this day, Macquarie Group continues as a prominent fiscal agent for the Government of BC and other public agencies in our province and country.
Secondly, there is the August 2010 report by the BC Auditor General wherein he recommends the Government provide expanded disclosure for $53 billion of goods and services not now included in the Government's statements of debt. Reference is made to P3 projects.
Thirdly, there is a video presentation on Face to Face, a Victoria-based community television producer. The specific presentation to watch is the lecture given by the University of Victoria's Dr. John Loxley, who is also the author of the book Public Service, Private Profits.
P3 financing usually starts with a project a government thinks it needs or simply wants for any number of political reasons. Governments have wrongly embraced the idea that the private sector can build and sometimes operate less expensively than can the more conventional way. They have also pretended that there was no public debt obligation arising from these projects, which is a deceit that Public Auditors are picking up on.
The Private Partner (PP) is usually a single source developer as opposed to a winning competitive bidder. The major determining factor is the PP's ability to source financing (recall that Macquarie was to be the PP for the new Port Mann Bridge but could not secure financing so the Premier had to go elsewhere). The PP's first requirement is to have a contract from a government or Crown Corporation that guarantees a minimum annual amount of cash flow, adequate to satisfy lenders. Because of construction cost uncertainties, there are accommodations made for cost overruns. To satisfy lenders further, the present value of these guarantees must exceed the cost to build, even after including cost overruns, by as much as the governments and Crown Corporations can be talked into. These arrangements provide spectacular opportunities for misconduct as the agreements are mostly secret by Order in Council.
For one electricity generation project, a plant at Duke Point on Vancouver Island, the present value of BC Hydro's guarantees exceeded the cost to build for the PP by $200 million. The cost to build was to be $300 million but the present value of the contractual guarantees was $500 million. It is every PP's wet dream to make this premium as large as possible because once the project is commissioned and the short-term financing is replaced by long-term financing, the PP is then able to monetize (turn into cash as much of the premium as possible) the amount determined by the guarantees from the public or their agents (like BC Hydro). Unfortunately, the public never gets an ownership position for this guaranteed premium. When PP equity monetization occurs, it is as if the PP had put up all risk money, which of course it never did.
Just before Christmas, the P3 shadow toll contract covering the Sea to Sky Highway improvement project went through this last monetization step. Macquarie Group sold its 100% interest to undisclosed investors at an undisclosed price. It is impossible to imagine the Macquarie Group did not realize a big gain from this transaction, all at the public's expense.
Erik Andersen, renowned BC economist, holds a Bachelor of Commerce from the University of British Columbia. He worked as an economist for a pre-eminent regional airline as for the Canadian Transport Commission. Andersen was Chief of the Economics Division of the International Civil Aviation Organization during the 1980s. A member of the Association of Professional Economists of BC, he was more recently in the media spotlight for his comprehensive study on the BC Government's structural changes at BC Hydro. He is currently President of the Gabriola Island Ratepayers' Association and in December 2010, Andersen joined the BC First Party Board of Directors as an economics consultant.
Links and sources
Macquarie model blowtorched
Observations on financial reporting: Summary financial statements 2009/10
Posted: January 05, 2011
Voices of privatization
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